Gold recoups losses as U.S. yields slip after CPI data

Gold bullion bars are pictured after being inspected and polished at the ABC Refinery in Sydney on August 5, 2020.
DAVID GRAY | AFP | Getty Images

Gold erased earlier losses to hit a one-week high on Wednesday, as U.S. Treasury yields eased after subdued inflation data, with bullion gaining further support from a dip in the dollar.

Spot gold was 0.2% higher at $1,718.36 per ounce, having bounced as far as $1,723.31. U.S.
gold futures
advanced 0.19% to $1,720.

"Gold is still taking cues from the Treasury market and today's data lessens worries about near-term inflation," said Edward Moya, senior market analyst at OANDA, saying that inflation pressures were currently driving yields, rather than gold, higher.

"If today's 10-year note sale has decent demand, gold prices could eventually make a run towards $1,730... The $1,700 level will provide key support...but that should hold unless the bond market selloff resumes," Moya said.

Ten-year U.S. Treasury yields slipped after data showed U.S. consumer prices increased in February, though underlying inflation remained tepid. Gold's status as an inflation hedge has been challenged by a firmer dollar and higher bond yields, which translate into a higher opportunity cost of holding non-yielding bullion. Prices fell to their lowest in nine-months on Monday, at $1,676.10.

Real rates have risen sharply over the last few weeks due to higher nominal rates, without a commensurate rise in inflation expectations, TD Securities wrote in a note.

"With massive Treasury issuance on the horizon, the pressure on higher rates should continue to weigh on precious metals in the near-term." The U.S. House of Representatives paved the way for a $1.9 trillion U.S. COVID-19 relief bill to be considered on Wednesday.

The European Central Bank is also grappling with a rise in yields, but policymakers remained divided on large-scale market intervention ahead of a policy meeting on Thursday. Silver rose 0.5% to $26.04 an ounce. Palladium was flat at $2,296.76, while platinum jumped 1.7% to $1,188.82.